Litigator of the Week: Third Circuit Shields Kalshi Sports Contracts from NJ Gambling Laws
Our Litigator of the Week is Will Havemann of Milbank. Havemann represented financial exchange and prediction market Kalshi at the Third Circuit in a case considering whether New Jersey could enforce state gambling laws against the company’s sports-related event contracts. In the first fight over state regulation of prediction markets to make it to a federal appeals court, a divided Third Circuit panel this week upheld a lower court injunction against the state. The majority held that contracts in question fell within the Commodity Exchange Act’s definition of 'swaps' which are subject to the Commodity Futures Trading Commission’s exclusive jurisdiction.
"Because Kalshi’s sports-related event contracts are traded on a CFTC-licensed [Designated Contract Market] and depend on event outcomes associated with economic consequences, they fit within the Act’s definition of 'swaps' subject to the CFTC’s jurisdiction,” wrote Circuit Judge David Porter.
Lit Daily: What was at stake for Kalshi in this appeal?
Will Havemann: It’s hard to overstate how important this litigation is to Kalshi. Starting early last year, New Jersey and other states began threatening Kalshi with criminal penalties for offering event contracts, including contracts related to sports. Kalshi very much believes in regulation, but its exclusive federal regulator is the CFTC, and it can’t comply with a patchwork of 50 different states’ laws while operating a nationwide exchange. So, it is critical to reaffirm that the CFTC has exclusive jurisdiction to regulate derivatives exchanges like Kalshi.
How did this matter come to you and the firm?
My partner Josh Sterling worked on prior litigation for Kalshi involving election contracts, so Milbank was a natural choice when states began sending Kalshi cease-and-desist letters. I joined Milbank a little over a year ago, and the Kalshi litigation was the first thing on my desk when I arrived. I’ll never forget the timing: New Jersey sent us a cease-and-desist letter on a Thursday, and we filed our complaint and sought a preliminary injunction at about 3 a.m. that Saturday morning. Very little sleep occurred in the meantime.
Who is on your team and how have you divided the work?
This is one of the largest and most complex litigations I’ve ever worked on. We have cases in 13 federal and state courts addressing whether federal law preempts state regulation of Kalshi. We also have seven appeals, two cases involving a federal statute called the Indian Gaming Regulatory Act, a group of cases brought by private LLCs seeking to recover under an 18th-century gambling law imported to this country from England, and a few class actions. All of which is to say that this litigation is a major undertaking, and I am just a small part of a great team.
The team and I put a lot of work into preparing for the oral argument. I’ve learned from the best—Neal Katyal was my second chair at the Third Circuit. Other key team members were Josh Sterling, our CFTC guru, Gurbir Grewal, the former Attorney General of New Jersey, Colleen Roh Sinzdak, who recently joined Milbank from the Solicitor General’s Office, and Grant Mainland, one of the most talented litigators I’ve ever worked with. There were too many other team members to name, but special mention is due to Sami Ilagan and Davis Campbell, two exceptional associates.
I started holding moot courts a couple of weeks before the argument to get a sense of every question that could come up. Because appellate arguments are so much shorter than district court arguments, a lot of the preparation involved distilling responses down to their core, to make sure that every second at the lectern advanced our case. Then it was an iterative process of testing answers and improving upon them based on feedback from Neal and the many other colleagues who helped me prepare.
What question was the Third Circuit being asked to resolve in this case, and why did it matter beyond Kalshi and New Jersey?
A federal statute called the Commodity Exchange Act grants the CFTC exclusive jurisdiction to regulate trading on federal derivatives exchanges, which are known as Designated Contract Markets or “DCMs.” Kalshi is a DCM, so this case presents the question whether trading on Kalshi is subject to exclusive regulation by the CFTC, or if instead 50 different states may subject Kalshi to a patchwork of 50 sets of differing regulations.
The case matters well beyond New Jersey and well beyond Kalshi. New Jersey’s theory would give states the right to ban all event contracts, so this case is really about whether prediction markets can exist in this country under federal oversight, or whether they’ll instead be pushed offshore where they will be subject to no oversight. The case is also a reprise of a longstanding turf battle between states and the federal government over innovation in the derivatives markets.
Here you had been granted an injunction below. How much of an advantage was that for you to be arguing to uphold a district court win in the first of these cases to go before a federal appeals court, rather than to be asking for a reversal?
It is always helpful to be defending a district court decision, especially a decision by an excellent judge like Judge Kiel. But the main issues in this case are legal questions involving federal preemption, and the Third Circuit reviewed those issues anew.
During argument, there was concern about slippery slopes—casino games, ping‑pong matches, raffle tickets. How did you convince the court that recognizing these contracts as swaps wouldn’t federalize all gambling?
It was important to us to convey to the Third Circuit that our position is a modest one. Federal law preempts state law only as applied to trading on federally regulated DCMs like Kalshi. It leaves states free to regulate activity that occurs off DCMs. The excellent counsel for New Jersey tried to persuade the panel that the implication of our argument was broader than that, with hypotheticals about ping-pong and raffles. But ultimately the majority agreed with us that our position would not lead to these slippery-slope consequences.
One of New Jersey’s central points was that states have historically regulated gambling. How did you address that tradition without minimizing legitimate state interests?
One of interesting things I’ve learned through these cases is that many states a century ago banned all futures trading as gambling—they called it “gambling in grain.” There are some colorful judicial opinions from the late 19th century banning futures trading as a “species of gambling” and a “national sin.” In our view, Congress clearly put an end to that when it granted the CFTC exclusive jurisdiction over trading on federal exchanges. So, while it is true that states have historically regulated gambling, there is a lot of evidence that Congress did not want states to regulate trading on DCMs as a form of gambling.
We do not want to minimize states’ interest in regulating gambling products over which they have jurisdiction. At the same time, we have tried to convey the important differences between Kalshi’s contracts and gambling products, to help explain why it makes sense for Kalshi to be regulated at the federal level. Unlike a sportsbook, Kalshi’s exchange is not the “house.” It doesn’t set odds, doesn’t win when its users lose, and doesn’t have any ability or incentive to favor itself over its users. Instead, it operates a nationwide exchange where users trade at prices set by market forces, which is how all derivatives exchanges operate.
The dissent argues that Congress never clearly intended the CFTC to function as a nationwide sports‑gaming regulator. What is Kalshi’s response to that concern?
Our response is the same as the majority’s—that the best evidence of Congress’s intent is the statutory text. And, in an important development since the Third Circuit case was briefed and argued, the CFTC itself has filed amicus briefs and affirmative lawsuits against states to defend its exclusive jurisdiction, and to convey that it is fully capable of regulating these instruments.
What’s next? Where else is Kalshi litigating with state litigators and when can we expect other federal appellate courts to weigh in on this question?
There is much more to come. Colleen Roh Sinzdak and I will be arguing at the Ninth Circuit for Kalshi next week. I also have a Fourth Circuit argument in May. Grant Mainland will be arguing in the Supreme Judicial Court of Massachusetts in May. Briefing is underway in two different appeals in the Sixth Circuit. And we have ongoing litigation in many (many!) different district courts.
What will you remember most about this matter?
The main thing I’ll remember is the extraordinary group of lawyers and staff here at Milbank whose hard work has put us in a position to be successful, and the clients who have entrusted us with the privilege and responsibility of representing them.
